Week Ending February 19

Crude Oil Bottom Line — Brent crude is up about 25% since early January, when Saudi Arabia announced additional supply cuts of 1 MMBbl/d through March. The Saudis recently announced (Feb. 17) that they are likely to return those barrels to the market starting in April, according to the WSJ. It seems they accomplished their mission.

But there are more supply decisions upcoming. OPEC+ will hold its official meeting with the broader coalition on March 4. If the group estimates demand to be fragile, which its research group believes, then maybe the group keeps its current quota policy. The cartel enjoys steep backwardation in the market, a curve structure that pays it more for its oil, but also dissuades future investment from competitors (like the U.S. producer). The members are undoubtedly aware of key price levels throughout the curve that could incentivize U.S. shale growth. With this in mind, we believe OPEC tries to manage reductions in supply cuts based on its view of demand growth.

Our recommendation for most clients? Swap it in. The news of Saudi production increases coincided with the top of the market on Wednesday. This oil market has come up fast and we see price levels in 2021 and 2022 as attractive and not worth hoping price further appreciates in the near-term.

Natural Gas Bottom Line — This was an historical week in the gas market. We saw cash-market prices in the hundreds of dollars in many regions affected by the polar vortex. While spot-market action usually doesn't have a great effect on gas futures, the weather was so cold, for so long, in such a large area that withdrawals from gas storage were probably maxed out across much of the southern U.S. Storage levels will further deplete to about 1.45 Tcf before summer, by our estimate. This week's gas withdrawals, to be reported next Thursday by the EIA, may be the largest-ever withdrawal from storage; some estimates are for 350 bcf+.

The gas futures have moved higher, but much. The Summer 2021 strip is now at its previous high near $3.05, set back in October. The Winter 2021-2022 strip has also rallied and remains about 5c shy of its October high.

Gas prices still have room to run. Even with the recent rallies, we do not believe price has incorporated all the possible upside that remains in the market. The fundamentals remain strong as production is not expected to grow and demand is firm.

AEGIS recommendations are little changed versus past weeks. We still advise using either swaps or costless collars in the summer depending on each producer's book. The trade desk recommends utilizing collars for the Winter 2021-2022 strip to help capture call skew and our upward bias in the market.